The top lawyer for a federal agency expressed reservations Thursday with a proposal floated by municipalities and private investors to restructure underwater mortgages by seizing them from other investors through eminent domain.

“There is a federal interest here,” said Alfred Pollard, general counsel for the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac. Together with government agencies, the mortgage giants guarantee around nine in 10 new loans being issued.

Mr. Pollard, who said he was speaking only for himself and not for the agency, said he had concerns that using eminent domain to seize mortgages as opposed to physical property, such as homes, would create problems for secured lending in the future.

“For 700 years in Anglo-American law, the use of property—collateral—to secure a loan was a contract that would be honored,” he said. Actions by states and municipalities to “attenuate,” or erode, the relationship between credit and collateral would necessarily call into question “the distinction between secured and unsecured” lending, he said. That in turn could raise the cost and availability of credit.

Mr. Pollard spoke at a conference Thursday in Washington, D.C., sponsored by the Mortgage Bankers Association, which is strongly opposed to the effort.

Mortgage Resolution Partners, a San Francisco-based group of venture capitalists, earlier this year began working with municipalities in San Bernardino, Calif., to explore the use of eminent domain to seize mortgages. Other cities, including Sacramento, Chicago and Detroit, have since looked into enacting a similar loan workout regime.

Supporters have argued that the industry hasn’t done enough to help clear a mountain of bad debt that has left millions of homeowners in homes worth far less than what they owe.

The MRP initiative is focused on targeting loans that were pooled into “private label” mortgage-backed securities that don’t carry backing from Fannie, Freddie or other government-related entities. It would also focus on underwater mortgages where borrowers are current on their payments.

The FHFA received some 74 written responses from the public during a comment period earlier this year in response to the eminent domain gambit. Mr. Pollard said he had reviewed the responses but hadn’t decided on any formal course of action.

California Lt. Gov. Gavin Newsom, meanwhile, said in a letter to Attorney General Eric Holder earlier this month that efforts by investors to charge more for loans—or to refuse to buy them—in areas that move ahead with the gambit would amount to collusion and “redlining.” Redlining refers to the practice whereby banks refuse to make loans in certain geographic areas, often poor communities with higher populations of minority borrowers.

FHFA has stymied other efforts by cities that it viewed as menacing towards property rights. In 2010, it effectively shut down the use of an energy-lien program by telling Fannie and Freddie that they should consider raising lending standards in municipalities that green lighted the initiative. Cities had proposed allowing homeowners to finance home improvements through tax assessments, which are senior to mortgage debt.